Fitch Ratings has downgraded Anagram Holdings, LLC and Anagram International Inc.'s Long-Term Issuer Default Ratings (IDRs) to 'RD' from 'C', downgraded its first lien secured notes rating to 'CCC-'/'RR1' from 'CCC'/'RR1' and affirmed the company's second lien secured notes rating at 'C'/'RR6'.

The rating actions follow the announcement on Sept. 21, 2023 that the company had failed to cure the missed interest payment on its first lien secured notes by the end of the 30-day grace period and termination of the forbearance agreement that it had entered into after electing not to pay the August 2023 interest payment on its first lien notes.

Key Rating Drivers

Uncured Missed Interest Payment: Anagram initially skipped an interest payment on its approximately $130 million first lien secured notes on Aug. 14, 2023, and entered into a 30-day grace period and an indenture forbearance agreement. On Sept. 21, 2023, the company announced that it had not cured the skipped interest payment, and that the indenture forbearance agreement had terminated, leading to an event of default under the Anagram first lien notes.

Fitch views the failure to cure the missed interest payment within the original grace period as a restricted default as per its ratings definitions. The event of default on the first lien notes triggered cross-defaults on Anagram's other debts, including its ABL facility and its second lien notes, and the company has stated it is in active dialogue with the holders of its debt to address the events of default.

Small Scale, Concentrated Customer Base: Anagram's scale is relatively small, with a helium shortage and operating pressures at its main customer (Party City) leading to sales potentially declining to the mid $100 million range in 2023. This compares with a peak of over $200 million in 2021 when pandemic restrictions resulted in more stay-at-home gatherings. In addition to its small scale, Anagram has customer concentration, with its parent company (Party City) representing around 35%-40% of revenues.

Operating Challenges in 2023: A global helium shortage has reduced demand for Anagram's products since 2022, leading to declining sales and profitability. Anagram's EBITDA margins could be in the low double-digit range in 2023 relative to the 20% range in 2020 and 2021, before improving to the mid to high teen range in 2024 and beyond, in line with improving helium supply, which could support increased demand. Fitch projects Anagram could generate negative FCF in 2023 driven primarily by the decline in EBITDA, and the company will likely need to rely on the limited capacity on its $15 million ABL revolver (which matures in May 2024) in order to finance the liquidity shortfall.

High Leverage and Growing Refinancing Risk: Fitch expects Anagram's EBITDA leverage could be around 15x in 2023 due to a continued decline in EBITDA (from 2022 levels in the $30 million range) before improving modestly to the low teen range in 2024, on some EBITDA recovery. Anagram's ABL credit facility matures in May 2024, with maturities of its first and second lien notes following in 2025 and 2026.

Parent Company in Bankruptcy: While a parent/subsidiary relationship exists between Anagram and Party City, Anagram's IDR is mainly based on its standalone credit profile. The analytical overlay section of Fitch's criteria allows for wider notching between parent and subsidiary during extreme situations such as when a parent is in bankruptcy and the subsidiary continues to operate outside of bankruptcy.

Derivation Summary

Anagram's 'RD ratings reflect the company's failure to cure its missed interest payment after the expiry of the original 30-day cure period/forbearance agreement following the non-payment of interest on its approximately $130 million first lien secured notes on Aug. 14, 2023.

Anagram's ongoing credit profile reflects continued business pressure, high leverage and growing refinancing risk, with its ABL revolver maturing in May 2024 and its first and second lien notes maturing in August 2025 and August 2026, respectively. The credit profile also reflects ongoing uncertainty related to the relationship with its parent, Party City Holdco Inc.

Anagram's rating compares with peer Rite Aid Corporation (CCC), whose structure looks increasingly unsustainable given ongoing operational challenges as the company approaches its 2025 maturities. Unlike Anagram, Rite Aid's ample liquidity of well over $1 billion under its revolver, rich asset base of pharmaceutical inventory and prescription files, somewhat mitigates the heightening refinancing risk.

Key Assumptions

Fitch expects revenue declines in the high-teen to mid-to-low 20% range in 2023 toward the mid-$100 million range, with inflationary pressures and high helium prices and shortages driving the decline in demand. Fitch expects Anagram's revenue could grow in the high single digit to low double-digit range in 2024 and thereafter driven by improving helium supply;

Fitch expects EBITDA margins decline to the low double-digit range in 2023 as a result of higher costs and declining demand, from around 16% in 2022. Margins could improve to the mid to high teen range in 2024 and thereafter driven by top line growth and improving input and supply chain costs;

Fitch expects FCF could be negative in 2023, driven primarily by the decline in EBITDA. In 2024, FCF could be break-even, driven by improving EBITDA.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to a positive rating action/upgrade:

Fitch will reassess the company's credit profile if there is a successful resolution to the current restricted default.

Factors that could, individually or collectively, lead to a negative rating action/downgrade:

The IDR will be downgraded to 'D' if a bankruptcy or restructuring occurs.

Liquidity and Debt Structure

Limited Liquidity: Anagram's liquidity is comprised of cash on hand, after the uncured missed interest payment on its first lien notes led to an event of default on under its ABL credit agreement ($15 million ABL facility which matures in May 2024). Fitch expects the company could generate negative FCF in 2023, driven primarily by the decline in EBITDA, which the company should be able to finance with liquidity on hand. Anagram's debt is composed of drawings on its revolver, around $130 million in first-lien secured notes due August 2025 and around $110 million in second-lien secured notes due August 2026.

Fitch's recovery analysis for Anagram is based on a going concern value of approximately $150 million, versus approximately $60 million from an orderly liquidation of assets, which is comprised of receivables, inventory and manufacturing assets. Post default EBITDA is estimated at around $30 million, which compares with approximately $38 million in EBITDA on around $200 million of revenue through as of the LTM ending Sept. 30, 2022 (based on Party City's public filings).

The $30 million going concern EBITDA represents the scenario of a loss of revenue from some of Anagram's largest retail and distributor customers, yielding around $150 million in revenue, offset by some expense management to generate 20% EBITDA margin (in line with historical levels). Fitch assumes Anagram could fetch a 5x multiple, at the low end of the 5x-7x exit multiples based on Fitch's consumer products bankruptcy studies, recognizing the business' strong market share and relatively stable category over the long term, offset by its small scale and recent operating challenges.

After deducting 10% for administrative claims, the remaining $135 million would lead to outstanding recovery prospects (91%-100%) for the $15 million ABL (assumed $11 million drawn) and approximately $130 million first lien secured notes, the latter of which is rated 'CCC-'/'RR1'. The second lien secured notes (approximately $110 million outstanding) would be expected to have poor recovery prospects (0%-10%), and are thus rated 'C'/'RR6'.

Issuer Profile

Anagram is a leader in the design and manufacturing of balloons and party products. Anagram Holdings, LLC is a wholly owned subsidiary of Party City Holdco, Inc. (the leading party-supply retailer in the U.S), which generates around 35% to 40% of Anagram's revenues.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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